Financial Independence and the Upside of a Shorter Life

Once again Scott Burns has written an excellent article for those of us wondering how we can be financially free in retirement. In this article, Scott talks about what it means to be a retired person of independent means. The good news for baby boomers is that it may not be as difficult as you think. The bad news is that the reason it may not be so difficult for us is that we are going to be dead sooner. Burns fiendishly calls this the “upside of death.”

Here is the important stuff. First, let’s assume that you want to have a retirement income that puts you in the top 20% of all incomes. According to an Aon replacement rate study, that would require a yearly income of $70,000. If you were a young person, securing that income fore life would necessitate a nest egg of $3.1 million. But you are not a young person. Being older and then retired helps. First, you don’t actually need all of the $70,000 because of lower taxes, no work-related expenses, and no more need to save. Second, this means that in addition to living off the interest and dividends from your savings and investments only (as a young person would), you can spend a little of the principal. Third, Social Security is going to replace about 42% of your pre-retirement spendable income. If you choose a moderately aggressive withdrawal rate of 5%, your nest egg requirement has now shrunk to $490,000. That’s quite a bit less than $3.1 million and it’s all because you will die sooner than a young person – the upside to death.

I like where Scott Burns is taking me with this vision. I plan on following this path of study a little more.